The Iran Deal: Who Has the Leverage?

Publication Type:

Panelists

This month marks the anniversary of the historic nuclear accord the United States and five other countries concluded with Iran a year ago. As a result of the accord, Iran has restricted the most worrisome parts of its nuclear program for a period of time, in exchange for relief from international economic sanctions. During the past year, the United States and its partners have amply fulfilled their obligations. Nevertheless, Iran claims to be still unsatisfied. It asserts that the economic benefits from the agreement have not been as great as it expected, and that an effort should be made to increase them. Iran also objects to any application of sanctions triggered by activity independent of the agreement, such as its missile tests, support for terrorism, arms imports and exports, and human rights abuses.

In response to these complaints, the United States has urged non-U.S. banks to engage in what it terms "legitimate business" (i.e., non-sanctioned business) with Iran. U.S. Secretary of State John Kerry promoted this message when meeting with the heads of some of Europe's largest banks in May. The United States also has been muted in its response to a series of Iranian missile tests and to ongoing Iranian missile-related procurement, and it has not issued any designations for human rights abuses since last July.

These actions seem to proceed from concern that Iran will judge the benefits from the agreement to be insufficient, and withdraw. But is such concern well-founded? How likely is it, in fact, that Iran will withdraw? And how many additional benefits can be offered to Iran without undermining existing U.S. policies—those related to missile and arms proliferation, export controls, human rights, terrorism, and illicit finance?

These questions were examined by a roundtable of experts hosted by the Wisconsin Project on Nuclear Arms Control in Washington, D.C. on June 15, 2016. The roundtable concluded that Iran would lose far more than it would gain by leaving the agreement now, that the United States has more leverage under the agreement than has Iran, and that instead of attempting to give Iran more benefits, the United States should use its superior leverage to create mechanisms that increase transparency and ensure that the terms of the agreement are enforced and its objectives achieved.

Valerie Lincy, Executive Director of the Wisconsin Project, hosted the roundtable. The participants were Olli Heinonen, Senior Fellow at Harvard University’s Belfer Center for Science and International Affairs, Kenneth Katzman, Senior Analyst at the Congressional Research Service, David Kay, Senior Fellow at the Potomac Institute for Policy Studies, John Lauder, an independent consultant on nonproliferation and arms control, and Michael Singh, Managing Director of the Washington Institute for Near East Policy.

Following are the roundtable’s findings, which are a composite of the panelists’ individual views. No finding should be attributed to any single panelist or be seen as a statement of the policy of any government.

Finding one: Iran is unlikely to walk away from the agreement now. The cost to Iran of so doing would far exceed any benefit.

The primary cost to Iran if it withdraws from the agreement would be economic and political. A decision by Iran to withdraw would be particularly costly now, before it has fully reaped the economic benefit from the agreement. The United States could re-impose immediately the sanctions that President Barack Obama suspended in January 2016, including restrictions on non-U.S. persons and companies engaged with Iran’s financial, energy, and shipping sectors. Any future American president could carry those sanctions forward, via executive order, without congressional action.

The renewal of U.S. sanctions, though unilateral, would impose costs. The panelists agreed that most banks or companies engaged in business with the United States would probably exit the Iranian market or forego the opportunity to enter it if U.S. nuclear-related sanctions were renewed. Even in the current environment, large European banks and many companies have been reluctant to reenter Iran, in part because of remaining U.S. sanctions. If forced to choose between trade with the United States or Iran, they would take the more lucrative path. Their governments may not follow the United States in re-imposing sanctions, but could not protect the firms from having to make that choice. And even if European Union countries and other foreign buyers were to continue purchasing oil from Iran, the re-imposition of nuclear-related sanctions would make it difficult for Iran to fully access the proceeds of those sales because of U.S. financial sanctions. The result would be the loss of most of the economic benefit Iran has received as a result of the agreement. Iran would also forgo prospective economic gains, first from its re-integration into the global economy and financial markets, and second from foreign investment. The hope of realizing these gains was Iran’s main motive for entering the nuclear deal. Losing them would be costly.

Iran would also surrender political benefits. Iran’s support for terrorism, its ballistic missile development, its human rights abuses, and its lack of corporate and financial transparency have all enjoyed a more tolerant attitude from the United States and its allies since negotiations on the nuclear agreement commenced in 2013, and even more so since the agreement was reached last July. Ending the agreement would reverse that tolerance overnight. Strong international criticism and sanctions would surely follow. In addition, Iran would sacrifice the domestic political benefit resulting from the promise of higher economic growth, lower unemployment, and greater social stability.

A secondary cost to Iran of withdrawing from the agreement would be the impact on the nuclear program. The accord reached last July gave Iran’s nuclear effort its largest and longest-sought benefit: legitimacy. At a single stroke, the accord ended Iran’s near-pariah nuclear status, opened the way eight to 10 years from now for Iran to be able to fuel a small nuclear arsenal quickly, and allowed Iran to gain this ability with the consent of the International Atomic Energy Agency and the United Nations. The panelists agreed that the accord offers Iran the surest pathway to “threshold” nuclear weapon status.

The panelists also agreed that it would be a great loss to Iran if it were to give that legitimacy up by leaving the agreement. As the agreement’s restrictions are lifted after 8, 10, and 15 years, Iran will be allowed to field a large, commercial-scale uranium enrichment capacity. President Obama has admitted that such a capacity will reduce Iran’s “breakout time”—that needed to produce weapon-ready uranium—“almost down to zero.” And Iran will be aided in its pursuit of this capacity by being able, for the first time, to import—legally—nuclear equipment, material, technical assistance, training, and investment through an official U.N. procurement channel. While Iran has historically relied upon illicit procurement to acquire nuclear imports, and most certainly will continue to do so for very sensitive items, the new U.N. channel should allow Iran to make nuclear purchases more easily, and without the risk of condemnation.

In addition to those losses, Iran would give up a chance in the coming years to escape restraints on its missile and arms imports. In as few as three years, according to the panel, Iran could receive the so-called “Broader Conclusion” from the IAEA, which would legitimate Iran’s nuclear program as peaceful. This Broader Conclusion—a term of art defined by the IAEA—would be granted if Iran is fully cooperative with Agency inspectors, has resolved concerns about its past nuclear activities, and answers the IAEA’s questions about its ongoing nuclear program.

The IAEA’s Broader Conclusion would trigger a second round of sanctions relief for Iran sooner than the milestone dates established in the agreement. The U.N. arms embargo (intended to be place for 5 years) and U.N. restrictions on ballistic missile technology and activity (8 years) would be lifted immediately. U.N. oversight of nuclear-related imports through the procurement channel would remain in place for 10 years, though prior approval of nuclear and nuclear related dual-use items would no longer be required—the Security Council would only need to be informed of such transfers. The second phase of E.U. and U.S. sanctions relief—including the E.U. arms embargo, E.U. restrictions on ballistic missiles, and remaining U.S. secondary sanctions—is slated to come in eight years but would also be triggered immediately by the Broader Conclusion. And once this Broader Conclusion is received, Iran could argue that other nuclear restrictions should be lifted sooner than provided for by the agreement because the IAEA has certified the country's nuclear program as peaceful.

Finding two: The benefit to Iran of withdrawal from the agreement would be minimal. It would serve mainly to reduce the time needed to make the fuel for one nuclear weapon.

The Obama administration’s stated objective in the nuclear talks with Iran was to impose sufficient constraints on Iran’s nuclear program so that for at least 10 years Iran would need one year to produce enough fuel for a nuclear weapon using its declared facilities and material in a “break out” scenario. The underlying rationale for this objective was questionable—it is highly unlikely that Iran would break out in order to fuel only one weapon— and the agreement left some uncertainty in how far the Iranians had progressed in all aspects of its nuclear weapons program. Still, the one-year benchmark proved to be the focus of public debate and the primary means of promoting the value of the agreement.

The panel estimated that if Iran withdrew and decided to boost its enrichment capacity as rapidly as possible, it could reduce its break out time to approximately six months by roughly doubling its existing capacity. This assumes that Russia would not return the low-enriched uranium Iran exported to it under the agreement, and that Iran would begin enrichment with natural uranium, of which it has a large stockpile. Iran would probably need between two and three months to reach such a doubling, which it could achieve by adding IR-1 centrifuges to the 5,060 now operating, or by adding the 1,000 more advanced IR-2m centrifuges now in storage at the Natanz plant. Despite withdrawing from the agreement, Iran's program would still be subject to inspections by the IAEA; the Agency would monitor and report on the expansion of enrichment.

After achieving this doubling, Iran could continue to add existing IR-1 centrifuges, of which it has some 12,000 in storage, or it could manufacture and install additional more advanced machines. The panel found the latter to be a more likely option because the advanced machines would not be contaminated by past use, have been properly tested, and are an estimated four or five times more powerful than the IR-1. As Iran adds centrifuges, the break out time would continue to fall. For instance, by adding 2,000 IR2-m centrifuges (assuming that an additional 1,000 of these machines exist) the breakout time might be halved again, which would bring it down to about three months. It is important to remember that a break out would be illegal—it would violate the Nuclear Nonproliferation Treaty—and probably be detected before succeeding. In addition to offending world opinion, the violation would create pressure on the United States and other countries to react. Iran would risk sanctions, other diplomatic and economic actions, and possibly military strikes in order to gain access to one bomb’s worth of enriched uranium. Such a benefit would not be worth the cost.

Finding three: Because Iran has much to lose and little to gain by withdrawing from the agreement, the balance of leverage now favors the United States. Therefore, there is no reason to grant Iran additional benefits.

The panelists agreed that the United States has lived up to its commitment under the accord. In January 2016, the Obama administration suspended the bulk of its secondary sanctions on Iran’s financial and energy sectors, including restrictions on most Iranian financial institutions, the shipping sector, and the insurance and transport of Iranian oil, gas, and petrochemicals. Iran has since been able to sell oil on the international market without volume limits. Iran has also been permitted access to the approximately $100 billion owed to it in foreign exchange reserves held overseas, although according to the Treasury Department roughly half of those funds were already obligated and thus are not available for repatriation or other uses.

The panel concluded that companies' willingness to do business with Iran is affected not just by certain remaining sanctions but also by other challenges. Accordingly, Iran’s present complaints are likely a negotiating tactic, aimed at gaining concessions beyond those already agreed. An example has been the request by the governor of Iran’s Central Bank and other Iranian officials for the reinstitution of "U-turn" transactions involving Iran, transactions that originate and terminate offshore but are cleared though a U.S. bank. Such a request might be explained by the possible overselling of the deal’s benefits to certain constituencies inside Iran. In response, the Obama administration, and Secretary of State John Kerry in particular, have launched a public relations and messaging campaign with European banks. Nevertheless, there have been no substantial concessions or changes in U.S. financial policy. Treasury officials have refuted media reports that the United States would reauthorize U-turn transactions for Iran, which have been prohibited since 2008.

The panel noted a number of reasons—independent of the accord—that could explain why Iran may not have received the benefits it hoped for:

The reintegration of the Iranian economy into the international financial and commercial systems takes time. European and Asian companies must navigate around legal hazards to re-enter the Iranian market.

Companies may wait for the U.S. Presidential election to see the fate of the Obama administration’s policies.

The lack of transparency in the Iranian market makes it difficult to do due diligence on potential counterparties who may be linked to entities still subject to U.S. sanctions, such as the Islamic Revolutionary Guard Corps (IRGC).

Iran remains a jurisdiction of concern for money-laundering and terrorism financing according to the Financial Action Task Force (FATF). FATF continues to advise financial institutions "to apply enhanced due diligence to business relationships and transactions with natural and legal persons from Iran."

Finding four: Instead of reacting to Iran’s additional demands, the United States should use its superior leverage to ensure transparency, monitoring, verification, and enforcement of the nuclear agreement. That is not now being done.

The United States has tried to counter Iran’s complaints about the accord by launching a publicity campaign in favor of increased trade. At the same time, however, the United States has done virtually nothing to support and publicize the structures that will be needed to ensure Iran’s performance of the accord. The panel concluded that the administration could be "soft-pedaling" the arms control aspects of the deal for a number of reasons. It could fear that Iran might walk away; it could want to demonstrate its own good faith and reasonableness; it could want to escape blame if the deal fails; it may not want to fuel U.S. domestic opposition to the deal, which has persisted since the deal was made.

Although the panel recognized the basis for such reasoning, the panel judged that vigorous enforcement of the agreement would only serve to strengthen it. If the Iranians saw the United States and its allies prioritizing enforcement, and saw that they have a clear, unified approach to responding to Iranian violations, Iran would be more, not less, likely to comply with the agreement. Nevertheless, the United States and its European partners have not taken any steps to clarify how they would handle Iranian non-performance. They should make this clarification at once. It is important to build a consensus on such a step before a breach occurs. It cannot be done effectively in a crisis.

The panel agreed that the United States and other parties to the agreement must vigorously exercise the inspection and consultative mechanisms of the agreement and meet any ambiguity or inconsistency in Iran’s compliance with a quick and appropriate response. Otherwise, leverage will begin to tilt back to Iran. A lack of response would allow Iran to build up a “background noise” of minor and then ever more serious violations, so as to blur any redline that would trigger a strong response. So far, the United States has shown that its response to a violation below the level that would trigger the snapback of sanctions will be either to do nothing, or to treat it as a problem to be corrected. For example, in response to the inability of Iran to meet the required cap on its heavy water accumulation, the United States agreed to purchase the excess stock rather than address a possible Iranian failure to meet an obligation.

A lack of vigorous response also establishes the narrative that Iran is fully complying with the accord and that the accord is functioning as it should. Such a narrative may not reflect the reality in the field. IAEA Director General Yukiya Amano has already noted disagreements between the IAEA and Iran over the interpretation of the agreement. There is also a problem with transparency. While a selling point of the agreement in the United States was a promise of increased transparency and visibility into the Iranian nuclear program, the terms of the agreement have led to less detailed IAEA reports, including missing details on crucial aspects of the nuclear program.

The panel warned that less comprehensive IAEA reporting also raises questions about nuclear material accounting, which is a core task of the Agency. For example, Iran's excess stock of heavy water, which the United States has agreed to purchase, has been sent to a port in Oman managed jointly by Oman and Iran. Therefore, the heavy water may still be under Iran's control. Such an arrangement creates a sanctuary for excess Iranian nuclear material and potentially a storage location for new purchases. Iran's export to Russia of some eight tons of low-enriched uranium raises a similar question: the material apparently has not been declared to the IAEA by Russia as an addition to its uranium inventory, so is it still technically under Iran's control? The panel concluded that these inconsistencies must be resolved.

A lack of transparency affects other parts of the agreement, including the operation of the Joint Commission and the procurement channel for approved nuclear sales to Iran. It is not clear, at least to outside observers, whether the Joint Commission, composed of all parties to the agreement, including Iran, is functioning effectively. This Commission oversees the various technical groups established by the agreement and is meant to handle disputes that arise related to implementation.

Regarding the procurement channel, little has been made public about how it will function, about the working group reviewing proposed sales, and about the group's criteria for approving or denying a sale. Nor does it appear that the group's decisions will be made public. As a result, those observing implementation of the agreement from "outside the fence line" have little sense of how this important element for controlling nuclear sales to Iran will function, and what specifically Iran will be permitted to purchase. In addition, there is the question of how approved sales will be checked. Under the agreement, the IAEA is responsible for checking the end-use for items used in Iran's nuclear program; supplier countries are responsible for dual-use nuclear items sent to other sectors of Iran's economy.

Related to the licit sales through this channel is the question of how smuggling outside the channel will be handled. Iran has publicly stated its intent to seek missile and military technology from abroad—a violation of U.N. Security Council resolutions—and there have been reports of attempts by Iran to procure nuclear-related items without passing through the channel.

In sum, the panel expressed concern that the United States and its partners failed to invest in the "dotting of i's and crossing of t's" in advance of the agreement's implementation. Such work is necessary and expected in an agreement of this importance.

To support more vigorous enforcement, the United States should give the agreement prominence inside the government. An implementation office should remain a high-level position in the State Department, within the Secretary of State's office. In addition, the United States should create an independent congressional commission, modeled on the United States-China Economic and Security Review Commission. It would monitor and oversee implementation and report violations. The panel observed that the Republican critics of the agreement declined to establish such a commission because doing so would be a tacit acceptance of the deal. But the panel recommended that Congress accept the deal as a political reality and instead do everything in its power to achieve vigorous oversight and enforcement.

In addition, with the leverage that it enjoys today, the United States should not be deterred from taking a more aggressive stance on Iran’s behavior outside the agreement, such as the abuse of human rights, illicit finance, support for terrorism, and the development of ballistic missiles, especially those capable of carrying a nuclear warhead. Such a stance would also help maintain U.S. leverage by reminding businesses interested in entering Iran of the risks in doing so while its malign behavior continues.

Finding five: Although the balance of leverage now favors the United States, that leverage will shift over time to favor Iran.

During the next two to three years, as European and Asian firms and others increase their engagement in Iran, contracts will be made and implemented, banking and other financial relationships will be developed, and it would be increasingly costly for European and Asian countries to join a renewed sanctions regime against Iran. At the same time, U.S. firms, through their foreign subsidiaries, may seek to follow their foreign competitors into what will be seen as a new market, to the extent permitted by the agreement and considering remaining U.S. sanctions. Boeing is already seeking to sell aircraft to Iran. As a U.S. stake in Iran grows, there may also be a domestic economic constraint on U.S. action. The only counterweight would be the reluctance of some Iranian businesses to lose the economic benefits they had begun enjoying. This might increase Iran’s reluctance to walk away from the agreement.

The stance on implementation and enforcement in the next few years will also affect future leverage. The current trend appears to be for the United States and its partners to ignore ambiguities or potential violations of the agreement below the "snapback" threshold. A pattern of non-action has set in that also applies to issues covered by the U.N. Security Council resolution implementing the agreement. If this trend continues, it will be difficult for the next U.S. administration to adopt a more forceful posture. A more forceful response could be seen as suddenly disproportionate.

In the later years of the deal, leverage will unquestionably shift in Iran’s favor. Sometime between years 10 and 15, Iran could be weeks away from producing one bomb’s worth of nuclear fuel, could have developed advanced ballistic missiles capable of delivering nuclear warheads, and have a commercial scale uranium enrichment capacity legitimated by the international community and certified as peaceful by the IAEA. By that time, Iran will also have received the benefits of the sunsetting restrictions on its nuclear and missile imports. The drastically shortened breakout time will give Iran a much stronger hand diplomatically, whether it chooses to threaten breakout, or to ratchet up the most threatening aspects of its nuclear effort. This will be true because the window of opportunity for the West to respond—whether diplomatically, economically, or militarily—will have become virtually closed.

* Mr. Katzman participated in this discussion in his personal capacity as an Iran expert, and not as a representative of the Congressional Research Service, the Library of Congress, or the United States Congress.